Rules of origin: Overview, definition, and example
What are rules of origin?
Rules of origin are the criteria used to determine the country of origin of a product, which is important for international trade and customs purposes. These rules specify how to classify goods based on their production, manufacturing processes, or the materials used in their creation. Rules of origin are used to assess whether a product qualifies for preferential treatment under trade agreements, such as reduced tariffs or other trade benefits. There are two main types of rules of origin: non-preferential (used for determining duties and taxes for goods traded under general international trade laws) and preferential (used in the context of trade agreements, where goods may qualify for lower tariffs or better terms if they meet the required origin standards).
For example, a product manufactured in the United States using materials from Mexico and Canada may qualify as a North American product under the United States-Mexico-Canada Agreement (USMCA) rules of origin, allowing it to be traded with preferential tariffs within North America.
Why are rules of origin important?
Rules of origin are important because they help determine how goods are treated under international trade agreements, which can significantly affect a company’s costs and market access. These rules ensure that the benefits of trade agreements are reserved for products that genuinely originate from the participating countries, rather than being artificially manipulated to take advantage of lower tariffs. They also prevent goods from being “dumped” into countries through minimal processing or manipulation of labels.
For businesses, understanding rules of origin is crucial for determining whether products qualify for preferential treatment under free trade agreements, helping them to reduce import duties and gain access to new markets. For governments, rules of origin help enforce trade agreements and protect local industries.
Understanding rules of origin through an example
Imagine a company based in the European Union (EU) that manufactures a pair of shoes using leather from Italy and rubber components from Thailand. Under EU rules of origin, the shoes may only qualify for preferential treatment (such as reduced tariffs) if a certain percentage of the total value of the shoe is derived from EU-made materials or processes. If the shoes fail to meet the minimum requirement for EU content, they may not benefit from the preferential tariff rates when exported to other countries within the trade agreement.
In another example, a car manufacturer in the United States sources its parts from multiple countries, including Mexico and Japan. Under the USMCA rules of origin, the car may qualify as a North American-made product if a certain percentage of its components are sourced from the US, Mexico, or Canada. This allows the car to be sold within the region at reduced tariffs compared to a car made outside the trade bloc.
An example of a rules of origin clause
Here’s how a rules of origin clause might appear in a trade agreement or contract:
“The goods supplied under this Agreement shall meet the applicable rules of origin as outlined in the [specific trade agreement, e.g., USMCA]. The Parties agree that the goods shall qualify as originating products based on the country of origin requirements and shall be entitled to preferential tariff treatment accordingly.”
Conclusion
Rules of origin are essential for determining the country of origin of goods in international trade, influencing how they are treated under various trade agreements. These rules help protect domestic industries, prevent trade manipulation, and ensure that benefits under trade agreements are properly allocated. For businesses, understanding and complying with rules of origin is critical for minimizing costs, optimizing tariffs, and gaining competitive advantages in global markets. Whether through preferential or non-preferential rules, knowing the origin requirements can help businesses navigate complex international trade landscapes effectively.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.